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Disney - results beat expectations

Revenue rose 34% to $21.8bn in the first quarter, which was better than analyst expectations.

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Revenue rose 34% to $21.8bn in the first quarter, which was better than analyst expectations. There was growth in both Media and Parks, with the most dramatic increase coming from Disney Parks, Experiences and Products.

Group operating profit more than doubled to $3.3bn, which was also better than expected. Total group profit was boosted by the non-repeat of $113m of restructuring and impairment charges this time last year.

The shares rose 7.7% in pre-market trading.

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Our view

Disney's back up and running. A deluge of customers returning to its very expensive-to-run theme parks means revenues and profits have been dragged up, after a very tumultuous couple of years.

The underappreciated hero has been the less glamourous broadcast and cable businesses. Revenues have proven remarkably resilient - all the more so when you consider how crucial advertising is to results. These traditional media assets accounted for almost every drop of profits in the tough times. No mean feat when you consider commentators have been forecasting the death of cable for years.

However, this may well have been Cable's last hurrah. Which adds pressure to Disney's digital TV efforts in its streaming business, through Disney+, ESPN+ and Hulu.

Rapid growth in the group's streaming services means going toe-to-toe with streaming giant Netflix. It's impossible not to be impressed by recent growth. However, the market cares a great deal about this division, and churning out the levels of growth expected is only going to become a more difficult task. If you didn't get a Disney+ subscription while trying to home-school in lockdowns, chances are you may never get one. For now, Disney is defending its competitive position against older players, but this isn't the walk in the park one might expect from a company with a content cupboard already brimming with famous blockbusters.

Disney is having to spend heavily to maintain its edge, taking free cash flow with it. And while the addressable market is huge - inflation may throw a spanner in the works. Household budgets under review means luxuries like multiple streaming subscriptions may come under fire. Disney needs customers to continue signing up in droves, or plans to scale and dig itself out of loss making territory will get thrown.

Fortunately we think Disney has a head start on rivals. An excellent content catalogue - whether that's princesses on Disney+ or quarterbacks on ESPN - is one thing - but Disney's ability to sell those products through a variety of channels, multiplies the benefit many times over. Theme parks, computer games, Disney Stores - all help the group squeeze maximum benefit from its content.

The $71bn acquisition of Twenty First Century Fox loaded the business up with debt. While not at dangerous levels, if interest rates are hiked faster than planned, debt reduction could become the main focus - taking resource from other areas.

We should add a quick note on valuation here. You'll notice from the box below that the group's PE ratio is currently above the long-term average. The stellar valuation is partly down to the pandemic-depressed earnings, but also reflects a genuine investor enthusiasm for Disney's direct-to-customer streaming service. Given the substantial costs associated with delivering success in streaming we worry that enthusiasm may be slightly overblown.

Disney key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Fourth quarter results

The Media & Entertainment Distribution saw total Disney+ subscriptions rise 37% to 129.8m, while ESPN+ and Hulu also posted growth. The average monthly revenue per paid subscriber for Disney+ Hotstar increased from $0.98 to $1.03 due to launches in new territories with higher average prices.

Despite this, higher production, marketing and technology costs meant operating losses for Direct-to-Consumer products rose 27% to around $600m. There were also higher programming and production costs in the traditional cable business, meaning operating profit also fell. For the Media & Entertainment division as a whole, operating profit fell 44% to $808m.

Parks, Experiences & Products saw revenue climb from $3.6bn to $7.3bn, as travel trends, park footfall and cruise ship sales improved. However, Disney also said it's continuing to limit capacity for safety reasons.

The division saw operating profits swing from a $119m loss to profit of $2.5bn. The group said: "Increased operating income at our international parks and resorts was due to growth at Disneyland Paris and Hong Kong Disneyland Resort".

Free cash outflows widened by $505m, reflecting higher payments due, other obligations and spending for TV content. Net debt stood at $39.7bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 10th February 2022